"Green Investors Have New Room to Grow"

David_Snowball

James Mackintosh, who has always been adamantly skeptical of ESG/SRI/green investing (though less loudly opposed to anti-woke/red investing, perhaps because it's so marginal), offered a nice analysis today (WSJ, 12/06/23, B1)of the year's ESG crumple and its prospects going forward.

"Invest according to your political views," he begins, "and you're unlikely to make money." One might point out that ESG investing isn't merely a political gesture (the "G" in ESG, especially, is predictive of corporate performance), but he's never been interested in nuance. And, heck, why bother pointing out that the Equal Weight ESG 500 has higher returns over the past year than the Equal Weight 500 (1.2% vs 0.7%, as of 12/6/2023). Or even that the ESG-screened 500 has outperformed the basic 500 over the same time period (15.7% vs 14.0%). And, by the way, the same is true over the past five years. It's much more fun to highlight the implosion of a few clean energy stocks and declare, "point made!"

The point that makes me less irked with him is "investors who bought green stocks probably didn't think they were making a leveraged bet on Treasuries, but that is what they ended up with." He argues that rising interest rates impact renewable energy stocks (for which he uses the synonym "green stocks") two ways. First, renewable energy projects are 80% debt-funded, and debt is increasingly expensive and hard to acquire. Second, consumers making personal investments in "green" products - heat pumps, solar, electric cars - also use debt, whether credit cards, HELOCs or second mortgages, to finance them. Higher borrowing costs lead to lower demand for those products.

High costs shift people's attention from the long-term - the need for renewables and global heating - to the short term - the need to cover the bill.

He also argues that much, though not all, of the "greenium" has been squeezed out of the market. Valuations on renewables are way down, if not deeply discounted. That makes that more economically rational purchases now than they were two years ago.

My sole green holding, which I've discussed in each of my annual portfolio disclosures, is Brown Advisory Sustainable Growth. It's up 32.4% YTD and has eked out 16% APR since I first bought it. Which is to say, I'm not sure that Mr. Mackintosh's analysis is quite so clear and profound as might be warranted by inclusion in the world's premier business paper.

WABAC

If your main goal is winning an argument, define the thing you want to beat to suit your argument.

James Mackintosh sounds like an able representative of the Journal's long-standing point of view.

On the news side of the financial press . . . Where are we going to get the water for all those data centers?

In Microsoft’s latest environmental sustainability report, the U.S. tech company disclosed that its global water consumption rose by more than a third from 2021 to 2022, climbing to nearly 1.7 billion gallons.

It means that Microsoft’s annual water use would be enough to fill more than 2,500 Olympic-sized swimming pools.

For Google, meanwhile, total water consumption at its data centers and offices came in at 5.6 billion gallons in 2022, a 21% increase on the year before.

In the same article I read that Meta wants to build a data center in Spain

which it expects to use about 665 million liters (176 million gallons) of water a year, and up to 195 liters per second during “peak water flow,”

Those that read agricultural news might have heard the Spanish drought is effecting olive oil production.

Both topics have been covered by the WSJ. The links probably end at a paywall. But for those that subscribe, read all about it.

https://www.wsj.com/finance/commodities-futures/cooks-beware-olive-oil-is-getting-a-lot-more-expensive-ba4cfd26

https://www.wsj.com/articles/ais-power-guzzling-habits-drive-search-for-alternative-energy-sources-5987a33a

I won't wait for Mackintosh to connect the dots.

And needless to say, Spain is not the only place suffering from drought.

BenWP

The argument about increased borrowing costs makes sense to me. A number of alternative-source energy projects have been scaled back this year. The one I just read about in the Times concerned SE Connecticut, where I grew up. While construction for massive turbines with blades more than 300' long is proceeding, albeit over budget and delayed, the scope of the project has been reduced.

Old_Joe

We need to be careful in defining "water use" in this context. For cooling purposes it's very possible to "use" a lot of water without removing it from other uses, such as agricultural irrigation.

"Water use" is not necessarily the same as "water consumption".

WABAC

Water dedicated to evaporative cooling does not go back into the local water supply.

More here.

Old_Joe

Why is that? It does with nuclear power plants- true, some of the water would be lost to evaporation, but surely not all??

WABAC

See my second link above for more detail. Some of it does go back, as industrial waste water.

This is just one example of the E in ESG being about more than what kind of light bulb you are using.

Old_Joe

Thanks- the link to the article regarding water consumption is very interesting. It seems that at least some of the large users are trying to minimize consumption and release more back for agricultural and other use.

WABAC

Let's look at the possible investing thesis. Let's take our AI overlords at their word that they will be "water positive" by 2030. And then refer back to Mackintosh's thesis about environmental investing. ISTM that we are talking about large levels of spending on stuff that will have to be manufactured, installed, and maintained. And none of it has to do with consumer debt or public works.

This is one of the reasons I invested in GRID, FIW, and still have EVX on my watch list.

Old_Joe

Thanks again for your link, above, "More here". Really goes into detail on the subject.

WABAC

Thanks for bumping it twice.

I prefer industry sources for stuff like that. Took me a while to find it.

sma3

Thanks for summary David. The editorials in the WSJ have gotten so extreme I cant stand supporting it with a subscription.

The problem with “ESG” is you can drive a truck through the lack of consensus about definitions.

bee

Matt Levine's email posts (I receive almost daily) are quite wordy, but very informative.

In my opinion, it's unfortunate that we have to monetize "Going Green". It appears it will end badly.

Here's his take on Carbon credits (I took the liberty to copy paste):

Carbon credits

If you live on some land, and it turns out there is oil under the land, then either you get to drill the oil and sell it and keep the money, or the government does, or someone else does. There are various legal regimes. Perhaps you get to lease the oil rights to an oil company and keep some of the money. Perhaps you get nothing; perhaps the government owns all the oil in your country and can cut its own deals with the oil companies without giving you anything. All sorts of possibilities. But in any case, either you get the money from the oil, or someone else does, or you split it somehow. Or, of course, the oil is not discovered, or not exploited, and nobody gets the money.

Similarly, if you live on some land, and it has trees, and you don’t cut down the trees, then the trees store carbon that might otherwise go into the atmosphere, and therefore they reduce global warming. And in the modern economy, those trees — or, rather, the fact of not cutting down the trees — can be turned into carbon credits; some big company will pay money for those credits to offset its own emissions. But who gets to sell the carbon credits and keep the money? Again, the possibilities include (1) you, as the person living on the land, (2) the government, or (3) someone else. Perhaps you can cut a deal with a carbon-credit company to preserve the trees, generate the credits and split the money. Perhaps the government owns all the not-cutting-down-trees in your country and can cut its own deals with global markets without giving you anything. All sorts of possibilities.

In a rigorous accounting regime, either you would get the money, or someone else would, or you’d split it, but unlike with oil, the laws of physics do not really dictate a rigorous accounting regime. If you sell oil to someone, you can’t sell it to someone else. If you sell not-cutting-down-trees to someone, nothing in nature prevents you (or someone else!) from also selling not-cutting-down those same trees to someone else, though well constructed carbon credit regimes do. This week the US Commodity Futures Trading Commission proposed some guidance on voluntary carbon credit regimes, emphasizing the importance of “no double counting,” that is, “that the [voluntary carbon credits] representing the credited emission reductions or removals are issued to only one registry and cannot be used after retirement or cancelation.”

Also, of course, nobody might get the money from the carbon credits — the carbon credits might not be produced and sold — but this is also a bit different from the case of oil. To drill up oil, you have to (1) know it is there (under the ground) and (2) spend money on drilling, storage, transportation, etc. Not cutting down trees is, as a matter of physical reality, much simpler than drilling up oil:

The trees are above ground (they are trees), so you can see them, so you know they are there.
Not cutting them down is easy and free: Cutting down trees takes intentional effort, so you can just not do that. [1]

That oversimplifies, though. For one thing, there is some opportunity cost of not cutting down the trees. (You can’t use them for firewood, building materials, etc.) For another thing, there is some cost of certifying and marketing the carbon credits. Also, though, a rigorous carbon credit regime doesn’t give you credit just for not cutting down any old trees; it gives you credit only for cutting down trees that otherwise would have been cut down. So if you live near a forest and enjoy the views and leave the trees alone, and then you try to sell carbon credits, the carbon credit buyers will say “no those trees are fine anyway.” The CFTC guidance also emphasizes the importance of “additionality,” that is, “whether the [voluntary carbon credits] are credited only for projects or activities that result in [greenhouse gas] emission reductions or removals that would not have been developed or implemented in the absence of the added monetary incentive created by the revenue from the sale of carbon credits.”

And so if you just live on some land, and it has some trees, and you leave those trees alone and have for generations, you might have a hard time making money from the carbon credit market. Whereas if you live on some land, and it has some trees, and you sometimes chop down those trees for firewood and building materials, and have for generations, the efficient carbon credit market approach might be for your government to bring in someone else — some outside carbon credit company — to manage the trees and protect them from you, generating carbon credits. And then the outside company and the government split the money. Maybe they give you some of it, to compensate you for your loss of use of the trees.

Here’s a Financial Times story about “ the looming land grab in Africa for carbon credits”:

One day in late October, leaders from more than a dozen towns across Liberia’s Gbi-Doru rainforest crammed into a whitewashed, tin-roofed church.

They had gathered to hear for the first time about a deal signed by their national government proposing to give Blue Carbon, a private investment vehicle based thousands of miles away in Dubai, exclusive rights to develop carbon credits on land they claim as theirs.

“None of them were aware of the Blue Carbon deal,” says Andrew Zeleman, who helps lead Liberia’s unions of foresters. ...

Blue Carbon, a private company whose founder and chair Sheikh Ahmed Dalmook al-Maktoum is a member of Dubai’s royal family, is in discussions to acquire management rights to millions of hectares of land in Africa. The scale is enormous: the negotiations involve potential deals for about a tenth of Liberia’s land mass, a fifth of Zimbabwe’s, and swaths of Kenya, Zambia and Tanzania.

Blue Carbon’s intention is to sell the emission reductions linked to forest conservation in these regions as carbon credits, under an unfinished international accounting framework for carbon markets being designed by the UN. In a market that is being designed for and by governments, it is among the most active private brokers. …

A copy of Blue Carbon’s memorandum of understanding with Liberia, dated July and seen by the Financial Times, proposed to give the Dubai-based company exclusive rights to generate and sell carbon credits on about 1mn hectares of Liberian land. It would receive 70 per cent of the value of the credits for the next three decades, and sell these tax-free for a decade. The government would receive the other 30 per cent, with some of this going to local communities.

The central conceptual oddity of carbon credits is:

You can get paid for not cutting down trees, and
If a tree is not cut down then everyone on Earth did not cut it down, but
Only one of them gets the carbon credit.

If a tree in Liberia is not cut down, then it is technically true that a Dubai company didn’t cut it down, but it is also true that I didn’t cut it down, and it is arguably even more true that the Liberian person who lives next to the tree did not cut it down. But the Dubai company has some advantages in terms of getting paid.

Baseball_Fan

@sma. Interesting view on the WSJ. I feel the same way about the NY Times and Washington Post along with propaganda like the Chicago Tribune.

What I find interesting about ESG is that you'd have to be an outlier to not want cleaner air, better environment, better society but many of these so called ESG funds are off base. Just look at the top holdings. Amazon. Look in your neighborhood for an hour and three separate delivery trucks will deliver separately to three different homes with small parcels. Not good for the environment. Look at Visa charging interest rates over 20%. Not good for society and folks who carry a balance united health care letting associates go to make their quarterly numbers.

Heck go look at brown advisory leadership. One black dude, one brown dude and like 30 white folks LMAO. Sure, talk the talk but no walkie the walk, eh?

Go look at all the folks buying the EVs. Generally wealthier virtue signalers who live in huge homes, multiple televisions, consume a lot of energy and resources to heat cool big homes, fly on vacations overseas which pollutes way more, buy groceries at whole foods that is shipped in from far away, not local yada yada yada

So yes I want a better environment etc but ain't buying what's being sold meaning the virtue signalling green washing

Baseball fan

WABAC

@Baseball_Fan, excellent points on the portfolios of many "ESG" funds. They're shaky on the E, and often cra crummy on the S and G.

Sure, BIAWX had a good year. But you're paying 79 cents for the same old stuff that has created a good year for lots of funds, some of which charge less. And many of the green funds charge a lot more.

Been trying for years to get my wife to cut the Amazon cord.

Mark

@Baseball_Fan - maybe you should go back to the Brown Advisory website and re-read what you thought you saw:

Brown Advisory sustainable strategy:

"ESG considerations that are material will vary by investment style, sector/industry, market trends and client objectives. The strategy seeks to identify companies that it believes may have desirable ESG outcomes, but investors may differ in their views of what constitutes positive or negative ESG outcomes. As a result, the strategy may invest in companies that do not reflect the beliefs and values of any particular investor. The strategy may also invest in companies that would otherwise be screened out of other ESG-oriented funds. Security selection will be impacted by the combined focus on ESG assessments and fundamentals of return and risk. The strategy intends to invest in companies with measurable ESG outcomes, as determined by Brown Advisory, and may seek to screen out particular companies and industries. Brown Advisory relies on third parties to provide data and screening tools. There is no assurance that this information will be accurate or complete or that it will properly exclude all applicable securities. Investments selected using these tools may perform differently than as forecasted due to the factors incorporated into the screening process, changes from historical trends, and issues in the construction and implementation of the screens (including, but not limited to, software issues and other technological issues). There is no guarantee that Brown Advisory’s use of these tools will result in effective investment decisions."

Brown Advisory Diversity, Equity and Inclusion Pillars

"We cannot be an innovative firm without a pronounced dedication to and investment in diversity, equity and inclusion."

As for your equity choice nitpicks:

Amazon - are all those delivery trucks from them? Are they fossil fueled or hybrid or electric powered?

Visa - what credit card company these days isn't charging over 20%?

United Health Care - plenty of companies are letting people go to make their numbers.

Isn't it possible that these choices are the best of the bunch given Browns investing strategy and practices? I sure don't know so maybe you could fill us all in. I don't see anything on their website where they claim to be perfect in their execution of same. They just claim that they strive to be responsible.

WABAC

I don't know about Baseball_Fan, but I try to avoid funds with more than a token appearance of Amazon due to their labor history, among other factors. If it shows up in an ESG fund @ 5% I just laugh, and keep on moving.

@Mark,

Isn't it possible that these choices are the best of the bunch given Browns investing strategy and practices? I sure don't know so maybe you could fill us all in. I don't see anything on their website where they claim to be perfect in their execution of same. They just claim that they strive to be responsible.

Are there funds that claim to be perfect? Are there funds that strive to be irresponsible? I don't know. Maybe you could fill us in?

Mark

@WABAC - I don't know the answer to your questions. We both know some funds say one thing and do another, at least until they are caught.

As for your dismissal of any ESG fund that consists of 5% Amazon stock Brown Advisory at least notes that their process may not meet everyone's beliefs and value standards.